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Some foundations for multiplicative habits models

  • Hiraguchi, Ryoji

Consumption models with multiplicative habits are becoming increasingly popular. However, mathematical foundations of such models are incomplete because the utility function with multiplicative habits is not concave. This paper shows that an optimal consumption path exists and it satisfies the first order conditions. The paper also shows that when the production function is linear, consumption growth rate along the optimal path converges to a positive constant under several parametric restrictions.

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File URL: http://www.sciencedirect.com/science/article/B6X4M-4P61N3W-2/2/c0e59f86a573d8056b3cd31515813ff3
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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 30 (2008)
Issue (Month): 3 (September)
Pages: 873-884

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Handle: RePEc:eee:jmacro:v:30:y:2008:i:3:p:873-884
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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  1. Carroll, Christopher D., 2000. "Solving consumption models with multiplicative habits," Economics Letters, Elsevier, vol. 68(1), pages 67-77, July.
  2. Takashi Kamihigashi, 2002. "A simple proof of the necessity of the transversality condition," Economic Theory, Springer, vol. 20(2), pages 427-433.
  3. Christopher D. Carroll & Jody Overland & David N. Weil, 1995. "Saving and growth with habit formation," Finance and Economics Discussion Series 95-42, Board of Governors of the Federal Reserve System (U.S.).
  4. Christopher D Carroll & Jody Overland & David N Weil, 1997. "Comparison Utility in a Growth Model," Economics Working Paper Archive 387, The Johns Hopkins University,Department of Economics.
  5. Nishimura, Kazuo, 1985. "Competitive equilibrium cycles," Journal of Economic Theory, Elsevier, vol. 35(2), pages 284-306, August.
  6. Juan Pablo RincÛn-Zapatero & Carlos RodrÌguez-Palmero, 2003. "Existence and Uniqueness of Solutions to the Bellman Equation in the Unbounded Case," Econometrica, Econometric Society, vol. 71(5), pages 1519-1555, 09.
  7. Jaime Alonso-Carrera & Jordi Caball?Author-Email: jordi.caballe@uab.es & Xavier Raurich, . "Growth, Habit Formation, and Catching-up\ with the Joneses," UFAE and IAE Working Papers 497.01, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  8. Francisco Alvarez-Cuadrado & Goncalo Monteiro & Stephen Turnovsky, 2004. "Habit Formation, Catching Up with the Joneses, and Economic Growth," Working Papers UWEC-2004-09-P, University of Washington, Department of Economics, revised Jan 2004.
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